The relationship between inflation rates and liquidity of commercial banks in Kenya

Abstract

The study sought to establish the relationship between the inflation rates and the liquidity of commercial banks in Kenya. Management of a firm’s short term assets and liabilities plays an important role in the success of the firm. Maintaining the optimal liquidity of a firm amid changing overall price levels is therefore an important objective of the firm. The aim of this study was to establish whether the liquidity of commercial banks is affected by the inflation. The population of the study was comprised of all 43 commercial banks in Kenya operating in the years 2008 to 2013. For a bank to qualify it needed to have been in operation during the whole period of the study and therefore institutions that merged or were not in operation in the whole period of study were eliminated. The study involved secondary data collection of the CBK liquidity ratio and inflation rates to measure the level of overall inflation. The study used secondary data obtained from audited financial statements of the banks at the end of the years of study. The study used descriptive statistics and regression analysis to establish the relationship between the study variables. Inflation rate was the independent variable while liquidity ratio was the dependent variable. Regression analysis found no significant relationship between inflation and liquidity ratio of commercial banks. This study concludes that inflation is not a significant macro-economic variable that influences liquidity ratio of commercial banks. With this finding in mind, the researcher recommends that managers of commercial banks need not take measures that aligns liquidity ratio with the prevailing inflation level. Instead, mangers of commercial banks should concentrate on other factors that affect the liquidity of the commercial banks